China: Done with deleveraging
Summary: It would be easy to be lulled into a sense of security by China's galloping equity markets. But this could prove a false step as the economy remains susceptible to slowing economic conditions.
Chinese equity markets on Monday posted their biggest 1-day gain since August 2015 leaving the CSI 300 up more than 20% year to date. Trading volumes in Shanghai and Shenzhen exceeded one trillion yuan, the highest level since November 2015, illustrating investor confidence. But despite the market turnaround the risk of slowing economic conditions still exists.
Why the exuberance? Releveraging has replaced deleveraging. China is hedging its bets and ramping up credit growth as a trade deal can’t save the turning cycle. The deleveraging drive that began after the 19th Communist party congress in late October 2017 appeared to have fallen by the wayside last month, something we previously flagged.
According to the China Banking and Insurance Regulatory Commission (CBIRC), “After two years of work, various financial disorders have been effectively curbed,” indicating the goal of structural deleveraging has been pushed aside.Deleveraging is done (for now at any rate)! There is unlikely to be an official announcement but actions speak louder than words and the recent uplift in the shadow finance market and trust loans highlights this.
The Chinese President, Xi Jinping, also confirmed this pro-growth bias in a Politburo meeting on Friday saying, “risk prevention should be done on the basis of stable growth.” Indicating the previous desire to prioritise controlling financial risks is no longer and policymakers are committed to supporting economic growth.
Xi also called for reforms in the finance sector and increased opening up of the industry – financial stocks took that very well. According to Bloomberg, all 30 stocks listed in Shanghai and Shenzhen with “securities” in their names were up by the 10% daily limit!
The severe tightening of credit driven by deleveraging had a big impact on the private sector which now contributes more than 80% of China’s employment and accounts for most new jobs created each year. The push to support private firms is rooted in the desire to maintain jobs growth and concurrently social stability.
The push from Beijing to drive growth via credit cannot be ignored, leverage is on the rise:
• The shadow finance market stopped dwindling for the first time since February last year.
• Undiscounted acceptance bill issuance rose by 379bn yuan and trust loans rose by 34.5bn yuan, wealth management product issuance is also on the rise.
• China’s new loan and aggregate financing hit a record high in January, primarily due to a more accommodative monetary policy stance. The 4.64trn yuan January increase in aggregate social financing is equivalent to approximately 5% of China’s GDP, and up markedly from 3.08trn yuan in January 2018.
• New yuan loans in January also surged to an all-time high, reaching 3.23trn yuan, up 13.4% from 2.90trn yuan a year earlier.
• Margin lending has risen over the past two weeks at the fastest pace since 2015.
The revival of credit growth will take several more months to feed through to the real economy.
Meanwhile the data suggests the slowdown continues and that the economy has not yet bottomed out, and we could see data deteriorating and a deeper slowdown before easing policies take effect. There is typically a lag of around nine months between credit growth and real economic growth. Also, these new stimulus measures fall on a weaker economy saturated with debt where the marginal impact of such measures will be less than in previous episodes of stimulus.
The markets are relying on policymakers to catch the dip and for the market moves to be warranted growth must turn around in the second half. Either policy makers have responded quickly enough and have managed to restimulate the economy, or the downside dynamics have already taken a strong grip and it is too late. If economic fundamentals continue to deteriorate equity markets will be susceptible to further weakness. Global growth estimates continue to be revised lower and the economic data remains poor. Despite the market turnaround the risk of slowing economic conditions still exists.